Finance basics: Get to know GICs

Are you looking for a safe place to invest your money? You might want to consider a Guaranteed Investment Certificate (GIC).

If you have shorter-term goals like buying a new vehicle or taking a family vacation, GICs are an ideal place to put your hard-earned savings. However, GICs can also be a good way to save toward long-term goals like the down payment for a home.

Here are the basics of GICs and why you might consider adding them to your investment portfolio.

What is a GIC?

A GIC is a secure investment that works similarly to a savings account. In short, you’ll earn interest on any money that you invest. Usually, the longer your GIC term (the length of the GIC), the higher the interest rate.

What are the main benefits?

If you’re looking for a steady return, GICs are worth considering. To get started, you may be able to invest in a GIC for as little as a couple hundred dollars. Whether you’re saving for something specific like a vacation or you’d simply like to keep your money in a safe place (out of sight, out of mind), a GIC can be a great place to invest.

Are GICs risky?

Unlike a mutual fund or a stock, when you invest in a GIC there’s very little risk. This is another major benefit. You don’t need to be concerned about losing your initial deposit since the money you invest is protected and guaranteed by the Deposit Guarantee Corporation (DGC), which covers credit union deposits 100% without limit.

A simple way you can spread the risk of GICs is by building a GIC ladder. For example, instead of investing $5,000 in one GIC for a five-year term, you could invest $1,000 in five different accounts, each with a different length term. You could have accounts with terms for one-year, two-years, three-years, and so on. By not putting all your GIC eggs in one basket (term), you can reduce your risk without having all your money locked up for the entire five years.

Is there a downside?

Although GICs carry a lower level of risk, they tend to offer a smaller investment return compared to mutual funds and stocks over time.

And if there’s a chance you might have to withdraw your money before the end of the term, a GIC may not be for you since you may be required to pay back all or some of the interest. However, if you stay invested until the end of the term, not only will you get back your initial deposit, but you’ll earn interest, too. (Keep reading to learn how to create more flexibility with multiple GIC accounts.)

Will I get taxed on my investment?

Yes, the income you earn on GICs is interest income, and this will be taxed at your marginal tax rate (the tax rate on your last dollar of income). If you’re holding a GIC in a non-registered account, don’t forget to factor in taxes when calculating the rate of return on your GICs.

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Sean Cooper is the bestselling author of the book, Burn Your Mortgage. He bought his first house when he was only 27 in Toronto and paid off his mortgage in just 3 years by age 30. An in-demand Personal Finance Journalist, Money Coach and Speaker, his articles and blogs have been featured in publications such as the Toronto Star, Globe and Mail, Financial Post and MoneySense. Connect with Sean on LinkedIn, Twitter, Facebook and Instagram.